Question

In 2007, there were many people in Sri Lanka who have an opinion that the government should interfere more in the
economy as there were some economic problems. The reason was the Sri Lankan citizens are not happy with the
future of some of their private car companies like Maruthi and Daewoo. The Sri Lankan car brands were victims of
low domestic demand. Most of the sales of these cars were made inside the country. Some economists wanted the
jobs of the people to be saved. Some other people wanted the government to give more freedom to the companies
and required no need to enter in the problems faced by the company. They believed that the freedom of the companies
will be lost. The Sri Lankan government has seen itself as a referee in market issues and has avoided entry in to
market issues in the past. The Sri Lankan government also is the owner of some companies in the country. Some
economists were of the opinion that the government interference will regulate anti-competitive behavior. However,
in the recession of 2009, when the economy was shrinking, the government was forced to spend more to stimulate
demand and had to intervene heavily to save the banking sector from collapse. The government also had to offer
financial support to businesses to keep them alive.
Based

2. Imagine that you are the finance minister of Sri Lanka. What would you do in this situation to solve the country’s economic problems? (words 250)

Answer 1

The main aim of the government should be to strengthen the domestic market. Increasing aggregate demand is the best way to help the industries to have enough sales for the economy to prosper. This will call for a complete reorganisation of the economy. The following steps can be taken by the government -

1. The most important step is to strengthen the labour laws in the economy. This will enable the labour class to earn more and consistent income. This can e done by guaranteeing the minimum wage and also other unemployment benefits and health insurance. If the labour class feels more secure about their earnings, then their marginal propensity to consume will increase and as a result, the aggregae demand will increase.

2. Firms and businesses should be incentivised to operate freely. This can be done by giving some tax exemptions so that the porductive activity in the economy increases. There will be more production, and that will create more employment and that will in turn help increase both the aggregate demand as well as the aggregate supply.

3. The monetary policy should be effectively used to increase investment in the economy. The more businesses are free to expand and invest, the more will the per capita as well as the national income increase in the economy. This will go a long way in increasing the economic strength of the nation.

4. Sector specfic programmes can be taken up to help those sectors that are lagging behind like the automobile sector. The government can give special grants and subsidies and or tax exemptions to this sector and help it grow by also creating a proper international market for this sector by reducing its export restrictions.

5. Finallt, the government has to carefully balance the fiscal policy along with the monetary policy so that the country is not left onto the path on inflation and price increase. If the monetary policy is expansionary to induce more investment, the the fiscal policy should be contractionary by including a tax system that is fair and progressive, and prudent government spending to help the government stick to the revenue earned.